1) people who are risk adverse, and who consequently paid off their mortgage early, and who have no regrets about what they did

2) people who are not risk adverse, and strongly empathise with the logical outcome that past market growth rates are greater than mortgage interest rates.

These two groups have different goals, and the attempts of some of those in group 2) to convince everyone in group 1) that they made the wrong choice, is not only pointless, but ignores the fact that not everyone's situation or wants is the same.

For the record, I'm an agressively group 2 sort of person, but.. live and let live.

Agreed, risk is the reason for target retirement fund changes. It is also the reason that endowment funds are not 100% stock even though they have indefinite time frames (longer than your early retiree ; ). It is the reason you can get a home loan at 3%, rather than the bank sinking that money into stocks.

Risk is the reason that in the sort term paying down a mortgage aggressively may be a good financial decision... not just an emotional one.

Risk ladies and gentlemen, is real. : )

Actually, volatility is the reason why target retirement fund changes. Risk and volatility are often used interchangeably (especially in academics for some reason), but while they are somewhat related they are not at all the same thing.

Acknowledging the usual caveats (an asteroid hits, Chinese invade, etc.) stock market risk is very close to zero, as long as you own a piece of the whole market and have a long holding period. On the flip side, bonds are very risky over long holding periods. That's why financial gurus like William Bernstein recommend never holding bonds greater than five years. You wind up losing your gains to taxes and inflation. Knowing how much money you will have in two or five years is surely a good thing, but you have to pay quite a bit for that certainty.

As an aside, this also relates to another reason why paying down the mortgage doesn't make sense. Let's say you took out a mortgage back in 1985 and dutifully paid it down. You saved a whole bunch of money, right? Not exactly. A 1985 dollar is only worth 45 cents today. In other words, you paid a full dollar now in order to save 45 cents in the future (at least for the last year of the mortgage).*

On the flip side, if you put that same 1985 dollar into the stock market you would have wound up with eighteen dollars today (or eight 1985 dollars, if you prefer). Spending one dollar to save 45 cents is not that great, but spending one dollar to get 18 is pretty awesome. And is spending a dollar to get 45 cents less risky than getting 18 dollars? Swami says no. Yes, you saved some volatility, but man you paid a high price for it. In a practical and very real sense you took a guaranteed loss in order to reduce volatility.

* Of course you couldn't get a 4% mortgage in 1985, so the example is for illustration only. Also, I'm using only the beginning and end points in my example, so stuff in the middle is less dramatic. Same principle holds though.

I am a William Bernstein fan, and I do agree with you that volatility is a more accurate term. I also agree with you that over the long term, (1985 in this case) equity is likely to triumph.

However, none of that changes the fact that over the short term, a less *volatile* investment may be financially wise and not just emotionally driven.

1) people who are risk adverse, and who consequently paid off their mortgage early, and who have no regrets about what they did

2) people who are not risk adverse, and strongly empathise with the logical outcome that past market growth rates are greater than mortgage interest rates.

These two groups have different goals, and the attempts of some of those in group 2) to convince everyone in group 1) that they made the wrong choice, is not only pointless, but ignores the fact that not everyone's situation or wants is the same.

For the record, I'm an agressively group 2 sort of person, but.. live and let live.

I agree with this sentiment overall. My only disagreement is the implication that the first group has not reached the "logical outcome." This is simply not true for the short term, where less volatile investments are advantageous.

However, none of that changes the fact that over the short term, a less *volatile* investment may be financially wise and not just emotionally driven.

No one has disputed the truth of this statement, but, again, it is irrelevant to the question of whether it makes sense (purely from a financial perspective) to prepay mortgage debt with a long term remaining weighted life to maturity (irrespective of whether or not your target retirement date is approaching in the short term).

However, none of that changes the fact that over the short term, a less *volatile* investment may be financially wise and not just emotionally driven.

No one has disputed the truth of this statement, but, again, it is irrelevant to the question of whether it makes sense (purely from a financial perspective) to prepay mortgage debt with a long term remaining weighted life to maturity (irrespective of whether or not your target retirement date is approaching in the short term).

Excellent, we seem to agree. : )

From a "purely financial perspective" prepay may not make sense over the long term.

From a "purely financial perspective" prepay may make sense over the short term.

Under the Internal Revenue Code, Canadians are free to claim a deduction for "qualified residence interest", assuming that the requirements of the statute are otherwise met. 26 USC § 163(a), (h)(2)(D). The statute does not consider the nationality or citizenship of the taxpayer. There is no requirement to be a US citizen to claim this deduction.

1) people who are risk adverse, and who consequently paid off their mortgage early, and who have no regrets about what they did

2) people who are not risk adverse, and strongly empathise with the logical outcome that past market growth rates are greater than mortgage interest rates.

These two groups have different goals, and the attempts of some of those in group 2) to convince everyone in group 1) that they made the wrong choice, is not only pointless, but ignores the fact that not everyone's situation or wants is the same.

For the record, I'm an agressively group 2 sort of person, but.. live and let live.

No we can't say that ;) Here's why: Paying down the mortgage is high risk/low reward proposition. I don't like risk, so paying down the mortgage is the last thing I want to do. I agree that everyone's situation is different, up above, soccerlovof 4 hates debt, and therefore paid off the mortgage. I see nothing to disagree with there. If you hate debt, that's what you do.

The disconnect is where people say they are risk adverse, therefore they pay down the mortgage. If you are risk adverse, paying down the mortgage is the opposite of what you do.

Of course risk is lower when you pay down the mortgage.The risk of changing house prices doesn't change, whether you pay off the mortgage or not. But you reduce your debt and your stock holdings. When you reduce your stock holdings, you reduce your risk. Simple as that.

You can't argue that the stock market carries basically zero risk (especially when you have to reduce returns every year by the interest payment). If that were the case, then stocks would yield the same return as short-term government bonds. But that's not the case. Not everyone's time horizon is 30+ years btw.

It's unhelpful to discuss "risk" in the abstract without being clear about exactly which risk you are referring to. There are many different risks relevant to this topic, some of which are mitigated by prepaying your mortgage (such as the risk of long-term stock market underperformance) and some of which are mitigated by investing in lieu of prepaying your mortgage (such as the risk of inflation).

Risk of inflation? How is that risk mitigated by investing in stocks? If there is higher than expected inflation, then stocks appreciate relative to debt and that's good. If there is deflation (or lower than expected inflation), then stocks depreciate relative to debt and that's bad. Hence, there is risk.

If I pay off my debt, then I do not care about inflation because I do not have debt or stocks.

Risk of inflation? How is that risk mitigated by investing in stocks? If there is higher than expected inflation, then stocks appreciate relative to debt and that's good. If there is deflation (or lower than expected inflation), then stocks depreciate relative to debt and that's bad. Hence, there is risk.

If I pay off my debt, then I do not care about inflation because I do not have debt or stocks.

It's unhelpful to discuss "risk" in the abstract without being clear about exactly which risk you are referring to.

^^

Holding $1mil in cash/bonds providing minimal returns is "low risk" in the "will you lose dollars" camp, but it's incredibly high risk in the "how much money are you really losing, given other options" camp.

In this context, I was thinking about risk in the usual market sense, i.e. what is the likelihood that the actual return matches the expected to return.

So, in the same sense that if you buy bonds in a AAA rated country, you have a much greater chance of getting the initial return, as compared to a B rated country, when because the chance of default is greater - you have a lower chance of getting the initial return.

So, if you are on a fixed home loan of X%, and you pay it off, you will save that X% each year. Its hard to think of any way you wouldn't. So that is why I said paying off one's home loan is a low risk approach. In the sense of, the return they eventually get, will almost always be exactly what they think it will be. In this sense, paying off a fixed home loan is very close to a risk free investment.

The market is also talked about, in terms of different risk levels, and generally, in theory, as an investor takes more risk, both their average returns and their volatility increase. It follows from this, that different investors have different risk appetites. You can't say someone is wrong just because they have a lower risk appetite than someone else. In contrast, it may be right to say that if someone has fulfilled their financial goals, they should have a lower risk appetite.

Risk of inflation? How is that risk mitigated by investing in stocks? If there is higher than expected inflation, then stocks appreciate relative to debt and that's good. If there is deflation (or lower than expected inflation), then stocks depreciate relative to debt and that's bad. Hence, there is risk.

If I pay off my debt, then I do not care about inflation because I do not have debt or stocks.

Because stocks generally go up.

Even more importantly (or at least more directly relevant to this topic), mortgage debt itself is one of the best inflation hedges available. No matter how much purchasing power the dollar loses over the 30-year life of the loan, you continue to repay the lender the same nominal amount of dollars.

If I pay off my debt, then I do not care about inflation because I do not have debt or stocks.

If you have any expenses whatsoever, then you should care about inflation (doubly so, if you are aspiring to be an early retiree with an extended retirement period). Inflation is the single greatest risk the typical early retiree faces.

In this context, I was thinking about risk in the usual market sense, i.e. what is the likelihood that the actual return matches the expected to return.

So, in the same sense that if you buy bonds in a AAA rated country, you have a much greater chance of getting the initial return, as compared to a B rated country, when because the chance of default is greater - you have a lower chance of getting the initial return.

So, if you are on a fixed home loan of X%, and you pay it off, you will save that X% each year. Its hard to think of any way you wouldn't. So that is why I said paying off one's home loan is a low risk approach. In the sense of, the return they eventually get, will almost always be exactly what they think it will be. In this sense, paying off a fixed home loan is very close to a risk free investment.

The market is also talked about, in terms of different risk levels, and generally, in theory, as an investor takes more risk, both their average returns and their volatility increase. It follows from this, that different investors have different risk appetites. You can't say someone is wrong just because they have a lower risk appetite than someone else. In contrast, it may be right to say that if someone has fulfilled their financial goals, they should have a lower risk appetite.

If you pay off your home, you also run the risk of an uninsured disaster destroying it.

In this context, I was thinking about risk in the usual market sense, i.e. what is the likelihood that the actual return matches the expected to return.

So, in the same sense that if you buy bonds in a AAA rated country, you have a much greater chance of getting the initial return, as compared to a B rated country, when because the chance of default is greater - you have a lower chance of getting the initial return.

So, if you are on a fixed home loan of X%, and you pay it off, you will save that X% each year. Its hard to think of any way you wouldn't. So that is why I said paying off one's home loan is a low risk approach. In the sense of, the return they eventually get, will almost always be exactly what they think it will be. In this sense, paying off a fixed home loan is very close to a risk free investment.

The market is also talked about, in terms of different risk levels, and generally, in theory, as an investor takes more risk, both their average returns and their volatility increase. It follows from this, that different investors have different risk appetites. You can't say someone is wrong just because they have a lower risk appetite than someone else. In contrast, it may be right to say that if someone has fulfilled their financial goals, they should have a lower risk appetite.

If you pay off your home, you also run the risk of an uninsured disaster destroying it.

But that's not comparing like-with-like. If you think of a home loan cost as being repayments+insurance, and then you pay it off and keep the insurance, your risk free return (for a fixed interest loan) is the saving in interest.

If yes, you decide not to keep the insurance, your return goes slightly up, and yes, so does your risk. But this holds for all insurance, and that's sortof the point of it, get insurance = risk and returns down: remove insurance = risk and returns up.

In this context, I was thinking about risk in the usual market sense, i.e. what is the likelihood that the actual return matches the expected to return.

So, in the same sense that if you buy bonds in a AAA rated country, you have a much greater chance of getting the initial return, as compared to a B rated country, when because the chance of default is greater - you have a lower chance of getting the initial return.

So, if you are on a fixed home loan of X%, and you pay it off, you will save that X% each year. Its hard to think of any way you wouldn't. So that is why I said paying off one's home loan is a low risk approach. In the sense of, the return they eventually get, will almost always be exactly what they think it will be. In this sense, paying off a fixed home loan is very close to a risk free investment.

The market is also talked about, in terms of different risk levels, and generally, in theory, as an investor takes more risk, both their average returns and their volatility increase. It follows from this, that different investors have different risk appetites. You can't say someone is wrong just because they have a lower risk appetite than someone else. In contrast, it may be right to say that if someone has fulfilled their financial goals, they should have a lower risk appetite.

If you pay off your home, you also run the risk of an uninsured disaster destroying it.

But that's not comparing like-with-like. If you think of a home loan cost as being repayments+insurance, and then you pay it off and keep the insurance, your risk free return (for a fixed interest loan) is the saving in interest.

If yes, you decide not to keep the insurance, your return goes slightly up, and yes, so does your risk. But this holds for all insurance, and that's sortof the point of it, get insurance = risk and returns down: remove insurance = risk and returns up.

Wait... what? Insurance and loan principle and loan interest and taxes are four different things. Just because you currently pay for all four with the same payment to a bank doesn't mean you have to drop insurance or get to stop paying taxes when you stop paying that particular bank.

When you don't have an escrow account (which, by the way, is not required by many loans) you pay those expenses directly.

I assume what dragoncar meant is that if you have 100% equity in your home, you necessarily bear 100% of the risk of any loss that is uncovered by insurance, which may not be the case if you still have a mortgage (depending, in part, on whether your jurisdiction limits the mortgage lender's recourse against the mortgagor).

I assume what dragoncar meant is that if you have 100% equity in your home, you necessarily bear 100% of the risk of any loss that is uncovered by insurance, which may not be the case if you still have a mortgage (depending, in part, on whether your jurisdiction limits the mortgage lender's recourse against the mortgagor).

Yes, not all risks are covered by regular home insurance. Flooding, earthquakes, mold, and so on. It may be possible to get extra insurance for some of these, but I find it hard to believe anyone carries ALL that insurance.

I assume what dragoncar meant is that if you have 100% equity in your home, you necessarily bear 100% of the risk of any loss that is uncovered by insurance, which may not be the case if you still have a mortgage (depending, in part, on whether your jurisdiction limits the mortgage lender's recourse against the mortgagor).

Yes, not all risks are covered by regular home insurance. Flooding, earthquakes, mold, and so on. It may be possible to get extra insurance for some of these, but I find it hard to believe anyone carries ALL that insurance.

There's twelve non-recourse states. Granted, California is one of them, but the majority of people in the country live in jurisdictions where they'll still be personally responsible if they walk away, regardless of the reason. Maybe I'm misunderstanding something, though.

I assume what dragoncar meant is that if you have 100% equity in your home, you necessarily bear 100% of the risk of any loss that is uncovered by insurance, which may not be the case if you still have a mortgage (depending, in part, on whether your jurisdiction limits the mortgage lender's recourse against the mortgagor).

Yes, not all risks are covered by regular home insurance. Flooding, earthquakes, mold, and so on. It may be possible to get extra insurance for some of these, but I find it hard to believe anyone carries ALL that insurance.

There's twelve non-recourse states. Granted, California is one of them, but the majority of people in the country live in jurisdictions where they'll still be personally responsible if they walk away, regardless of the reason. Maybe I'm misunderstanding something, though.

Right, 25% of the population is non-recourse, and the other 75% has access to things like mortgage adjustments and so on. It's likely that the bank will take a significant haircut in the event of a total loss (land usually still has value though...)

1) people who are risk adverse, and who consequently paid off their mortgage early, and who have no regrets about what they did

2) people who are not risk adverse, and strongly empathise with the logical outcome that past market growth rates are greater than mortgage interest rates.

These two groups have different goals, and the attempts of some of those in group 2) to convince everyone in group 1) that they made the wrong choice, is not only pointless, but ignores the fact that not everyone's situation or wants is the same.

For the record, I'm an agressively group 2 sort of person, but.. live and let live.

Post of the thread so far, and completely agreed, although I fall into group 1. Folks from group 2 aren't going to convince group 1 folks that they wasted money; this is one of the many areas where people can find things more important than the almighty 'stache. Everyone's got something (many things) they value more than building wealth, or else everyone on this forum would be working as many hours as possible while living in sheds with 30 roommates.

No we can't say that ;) Here's why: Paying down the mortgage is high risk/low reward proposition.

Perhaps by your definition of risk. By mine, the risk of an outstanding mortgage is an inability to pay my mortgage due to uncertainties in the future, potentially leading to losing my home, and the reward of an eliminated one is needing very little money to keep a roof over my head once the mortgage is paid off. As a result, by my definition of risk, paying down the mortgage was a very low risk, high reward proposition.

If you don't value these things, that's fine. But folks who pay off their mortgages generally do.

I think this depends on folk's viewpoint and their particular circumstances. Mine was -- only 4 yrs to payoff so was not getting any tax break anymore on federal returns, lack luster stock returns of late, and we have maxed out all our tax-deferred contributions for decades. A guaranteed return of 4.5% - we'll take it.

However - someone else might be inclined to take that cash over the four years and play the market and could feel quite assured they could make 8% - maybe they could. So, to each their own.

When we moved we had no US credit. For some reason I still don't qualify for a Target card. It was super annoying when we moved because I opened an account with our first US bank and they wouldn't give me a credit card with a sign up bonus even though I had hundreds of thousands of dollars in an account with them.

Having the cash liquid allowed us to buy a house cash (which gave us leverage to negotiate the price down).

I also believe that having better cash flow (no payments for mortgage / cars) makes it much easier for my wife to stay home with our two young kids.

I believe that long term having a mortgage and dumping all the cash into the market is probably a more optimal path to FI. But, the piece of mind that comes with having no monthly payments is worth it for us at this point in our lives.

My plan is to rent and dump the money into the market when I reach FI.

I've seen a few people say that paying off their mortgage means they have improved cash flow. Well, for some, like me, the opposite is true. I have a fairly good stash of shares, and I could sell them and really reduce my mortgage. But my dividend yield at the moment is 5%, and my mortgage is 4.5%, so I'd actually go backwards.

I've seen a few people say that paying off their mortgage means they have improved cash flow. Well, for some, like me, the opposite is true. I have a fairly good stash of shares, and I could sell them and really reduce my mortgage. But my dividend yield at the moment is 5%, and my mortgage is 4.5%, so I'd actually go backwards.

I am hoping to pay off my mortgage "early" in the sense I refinanced to a 15 year mortgage 5 years ago (10 more years to go!). So I am in the uncertainty period, where more money is going to the mortgage, yet it is not paid off. We also have a low emergency fund at this time. If we can get through next 10 years OK and then have it paid off I will be happy. I am looking forward to having it paid off. However if something hits the fan during that time, then maybe I will feel we made the wrong decision. So check back with me in 10 years.

I had been ignoring tax, which doesn't really change the result, but it makes it different.

If you're game.. read on...

I'm in Australia, so I don't get a tax deduction on my mortgage, and there's this thing called dividend imputation - which means, a share of the company tax that is paid, gets passed onto share holders, and it reduces the tax you would have to pay yourself. Effectively, if your personal tax rate is the same as the company tax rate, you effectively don't pay tax on most dividends. 'Unfortunately', I'm a bit above that, so I pay about 10% tax on my dividends, so 5 goes down to 4-4.5% (I'm not quite sure), so my example above doesn't really hold.

But it still does, because for many of my shares, I've borrowed money to pay for them, and effectively that interest is a tax deduction (those shares are about half at 4.5%, and half at about 7%, call it an average of 6%) so for them, I don't pay 6% interest, its more like 0.6*6 = 3.6%. So for those shares, even with the dividend tax, I would have worse cash flow if I sold them, and paid off the mortgage.

I've seen a few people say that paying off their mortgage means they have improved cash flow.

It's silly to focus on cash flow effects in isolation without also considering balance sheet effects. People who are citing "improved cash flow" as a benefit of paying off their mortgage may not realize that the strategy of retaining your mortgage and keeping the proceeds invested effectively leaves your non-mortgage-related cash flow intact, because you have a pile of assets (that you otherwise would not have had) that will service your remaining mortgage payments for you. That is, once you have accumulated enough investments to pay off your mortgage in full (but opt not to do so), those investments become the source of your remaining mortgage payments.

I've seen a few people say that paying off their mortgage means they have improved cash flow.

It's silly to focus on cash flow effects in isolation without also considering balance sheet effects. People who are citing "improved cash flow" as a benefit of paying off their mortgage may not realize that the strategy of retaining your mortgage and keeping the proceeds invested effectively leaves your non-mortgage-related cash flow intact, because you have a pile of assets (that you otherwise would not have had) that will service your remaining mortgage payments for you. That is, once you have accumulated enough investments to pay off your mortgage in full (but opt not to do so), those investments become the source of your remaining mortgage payments.

Without agreeing with 'silly', I'd agree with the rest of this. If my [HO HO HO HA HA HA] grand master plan works out this year, the dividends from all my shares, will pay all the interest on all my loans, but if I sold off all my shares, I'd still have a small mortgage that I'd have to pay myself.

I've seen a few people say that paying off their mortgage means they have improved cash flow.

It's silly to focus on cash flow effects in isolation without also considering balance sheet effects. People who are citing "improved cash flow" as a benefit of paying off their mortgage may not realize that the strategy of retaining your mortgage and keeping the proceeds invested effectively leaves your non-mortgage-related cash flow intact, because you have a pile of assets (that you otherwise would not have had) that will service your remaining mortgage payments for you. That is, once you have accumulated enough investments to pay off your mortgage in full (but opt not to do so), those investments become the source of your remaining mortgage payments.

As long as the market perpetually rises. We might see the market drop below 07 levels before the current mess settles down...I wouldn't be surprised if we are left with a window where paying your debt down even at 3% rates works out to be a better investment than the market. The average person who put money into the market for the last two years is down on that money right now...if we have a big drop that takes several years to make new highs I'm not seeing how watching your principal shrink just to hopefully collect enough dividends to cover your interest was the better investment, while the guy that paid his down has less bills to pay each month and can sink more money into a down market.

No we can't say that ;) Here's why: Paying down the mortgage is high risk/low reward proposition.

Perhaps by your definition of risk. By mine, the risk of an outstanding mortgage is an inability to pay my mortgage due to uncertainties in the future, potentially leading to losing my home, and the reward of an eliminated one is needing very little money to keep a roof over my head once the mortgage is paid off. As a result, by my definition of risk, paying down the mortgage was a very low risk, high reward proposition.

If you don't value these things, that's fine. But folks who pay off their mortgages generally do.

Actually I highly value those things (ability to pay regardless of future uncertainties, avoiding losing my home, etc.). And those are the exact reasons why it is needlessly risky to pay down the mortgage.

Let's do a hypothetical. Let's say you are dutifully paying down your mortgage for some number of years, and some unforeseen bad event happens. Illness and can't work, company goes out of business, whatever. Now you need money to live on or pay the doctor or whatever and you're sunk because your money is tied up in your house. You can't pay the mortgage, and the bank might still foreclose even if you are only one payment away.

On the flip side, let's say you are dutifully saving and investing for the same number of years and the same bad event happens. You're in fine shape. You could continue to pay the mortgage for years if needs be, not to mention have money to move to a new job, or get the car fixed or whatever. That's true even if there is a market downturn. One of those scenarios is clearly riskier, and it is the one that involves paying down the mortgage.

At this point people usually say you should have an emergency fund, etc. before starting to pay down the mortgage. And that's good advice, but you're still in a better situation not having the money in the house because you'll simply have lots more money available, which means you can survive a bigger, longer crisis should one occur.

If someone came to you and said they had an illiquid and slowly (or not at all) appreciating asset they wanted you to invest in for safety reasons, you'd say they are nuts. Yet that's what putting your money into the house is.

No we can't say that ;) Here's why: Paying down the mortgage is high risk/low reward proposition.

Perhaps by your definition of risk. By mine, the risk of an outstanding mortgage is an inability to pay my mortgage due to uncertainties in the future, potentially leading to losing my home, and the reward of an eliminated one is needing very little money to keep a roof over my head once the mortgage is paid off. As a result, by my definition of risk, paying down the mortgage was a very low risk, high reward proposition.

If you don't value these things, that's fine. But folks who pay off their mortgages generally do.

Actually I highly value those things (ability to pay regardless of future uncertainties, avoiding losing my home, etc.). And those are the exact reasons why it is needlessly risky to pay down the mortgage.

Let's do a hypothetical. Let's say you are dutifully paying down your mortgage for some number of years, and some unforeseen bad event happens. Illness and can't work, company goes out of business, whatever. Now you need money to live on or pay the doctor or whatever and you're sunk because your money is tied up in your house. You can't pay the mortgage, and the bank might still foreclose even if you are only one payment away.

On the flip side, let's say you are dutifully saving and investing for the same number of years and the same bad event happens. You're in fine shape. You could continue to pay the mortgage for years if needs be, not to mention have money to move to a new job, or get the car fixed or whatever. That's true even if there is a market downturn. One of those scenarios is clearly riskier, and it is the one that involves paying down the mortgage.

At this point people usually say you should have an emergency fund, etc. before starting to pay down the mortgage. And that's good advice, but you're still in a better situation not having the money in the house because you'll simply have lots more money available, which means you can survive a bigger, longer crisis should one occur.

If someone came to you and said they had an illiquid and slowly (or not at all) appreciating asset they wanted you to invest in for safety reasons, you'd say they are nuts. Yet that's what putting your money into the house is.

I could equally come up with a hypothetical:

Let's say that you invest all extra money towards the market. You're a new investor so you start investing '07. The market tanks so your now averaging half of what you put in. Your job also lets you go for being in a down time. You're now having to pay down your mortgage using money that lost 50% of its value, but if you had simply put money towards the mortgage from the beginning you would have had it paid off, and you wouldn't be forced to make this terrible deal of selling in a down market.

While paying down mortgage is suboptimal when everything goes right, it's even worse to sell investments in a bad market. I think a good compromise of risk, liquidity, and returns is to instead put extra money toward bonds for your allocation. A good bond fund at about a 2% return will remove most of the interest from the mortgage at today's rates and remain liquid in bad times. It also can be a separate fund from your regular allocation so that there is still room to re-balance.

Downside to this plan though that you'll need to assess for you is that you'll need to evaluate of any mortgage tax deduction for yourself, and you'll be paying dividend taxes on the bonds, eating the 2%. But you will simultaneously have both inflation protection (mortgage) and deflation protection (bond), and that might be worth something.

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Let's say that you invest all extra money towards the market. You're a new investor so you start investing '07. The market tanks so your now averaging half of what you put in. Your job also lets you go for being in a down time. You're now having to pay down your mortgage using money that lost 50% of its value, but if you had simply put money towards the mortgage from the beginning you would have had it paid off, and you wouldn't be forced to make this terrible deal of selling in a down market.

Ahhh, just take out your basic 2 year mortgage, pay it off, and you'll be all set. Completely risk free!

While paying down mortgage is suboptimal when everything goes right, it's even worse to sell investments in a bad market. I think a good compromise of risk, liquidity, and returns is to instead put extra money toward bonds for your allocation. A good bond fund at about a 2% return will remove most of the interest from the mortgage at today's rates and remain liquid in bad times. It also can be a separate fund from your regular allocation so that there is still room to re-balance.

But isn't it even worse to be out the money AND lose your house? If you can't make your payments now, those pre-payments you made when you could don't really help you.

« Last Edit: January 20, 2016, 06:06:25 PM by Eric »

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"Compound interest is the most powerful force in the universe." -- Einstein

I may regret paying it down if something bad happened and I really needed that money, but I am sure I will not regret it when it is paid off. I have a lot of investments that I can draw from if needed, I see paying off the house another diverse investment that gives me a significant return.

Right now I pay a little over 4% interest per year, which works out to 10k a year in pure interest. This is not enough to give me an interest deduction on my taxes. If I make 5% dividends I have to pay tax on it and it is MUCH riskier.

If everything goes south, stock market crash and job loss all at once, I want my income requirement to be as low as possible so I do not need to touch my remaining investments and I can sleep at night. I want all my bills under the unemployment check which is just a fraction of a normal paycheck for me, and I want to qualify for stuff like subsidized health care and reduced school lunches for my kids. Everything revolves around income in the US as far as handouts (and not net worth which is strange). I rather get my bills as low as possible so I can soak in some of those handouts if needed in a dire situation. I would not feel as comfortable pulling money out of a portfolio that lost half it's value. The piece of mind factor is the biggest however for me, worrying about paying my bills when I get layed off is always on my mind, I have never felt secure in my tech job especially since they do yearly layoffs at my company. Overall, I see paying off the house as diversification, I already maxed out 104k in retirement accounts, I think putting the rest in the mortgage is ok and I have a decent safety net with the 5 year rolling roth if I need to tap it.

Edit: One other point, I get "scared" when my non retirement accounts go down a lot and sometimes do rash things. I also use the mortgage prepayment as a forced savings. I wish I had more discipline but I tend to let emotion sometimes get to me and "trade" at the wrong time. I tried once "investing" the money for a new (used) car since I got 0% interest, lets just say I pissed some of that away and ended up being like 5k in the hole. I should have just payed off the car or maybe put the money in a CD (something I cannot F up). This is another reason, it motivates me at work too to keep chunking down that mortgage, I do not get the same fuzzy feeling watching my brokerage account bounce around where the mortgage number only goes the direction I want at all times (down).

Ahhh, just take out your basic 2 year mortgage, pay it off, and you'll be all set. Completely risk free!

It really depends on the size of your mortgage and what your talking about. I have about $100k mortgage, so yeah if I wanted I could pay it off over 2 years. I realize for some people with 500k mortgages is this probably out of reach.

If you're 100% stocks though in a 30% downturn, on $100k. If that lasts about 1.5 years, so let's say about $20k in mortgage payments. You's have to wait for a 100% market upswing to make it back to even. That's why I gave a middle ground of having more in less volatile assets while carrying a large debt.

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Let's do a hypothetical. Let's say you are dutifully paying down your mortgage for some number of years, and some unforeseen bad event happens. Illness and can't work, company goes out of business, whatever. Now you need money to live on or pay the doctor or whatever and you're sunk because your money is tied up in your house. You can't pay the mortgage, and the bank might still foreclose even if you are only one payment away.

HELOC. Refinance. Sell it and rent somewhere cheaper for a year or two until you get straightened out. Problem solved. I suppose you could say the value of your house tanked and you have no equity...but the last time that happened to a large extent the stock market crashed with it, so you would have ended up selling stock at a heavy loss and still been equally screwed.

If someone came to you and said they had an illiquid and slowly (or not at all) appreciating asset they wanted you to invest in for safety reasons, you'd say they are nuts. Yet that's what putting your money into the house is.

Yup...but that same guy would also be telling you it would lower your monthly expenses by hundreds or thousands of dollars a month, so suddenly he becomes genius instead of nuts.

Ahhh, just take out your basic 2 year mortgage, pay it off, and you'll be all set. Completely risk free!

It really depends on the size of your mortgage and what your talking about. I have about $100k mortgage, so yeah if I wanted I could pay it off over 2 years. I realize for some people with 500k mortgages is this probably out of reach.

If you're 100% stocks though in a 30% downturn, on $100k. If that lasts about 1.5 years, so let's say about $20k in mortgage payments. You's have to wait for a 100% market upswing to make it back to even. That's why I gave a middle ground of having more in less volatile assets while carrying a large debt.

Right, but at least you have the option to MAKE THOSE PAYMENTS. If you paid extra to your mortgage, but didn't pay it off yet, you're screwed. If you make it to fully paid off, then you're golden. But until that time, the risk is much much larger.

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"Compound interest is the most powerful force in the universe." -- Einstein

No we can't say that ;) Here's why: Paying down the mortgage is high risk/low reward proposition.

Perhaps by your definition of risk. By mine, the risk of an outstanding mortgage is an inability to pay my mortgage due to uncertainties in the future, potentially leading to losing my home, and the reward of an eliminated one is needing very little money to keep a roof over my head once the mortgage is paid off. As a result, by my definition of risk, paying down the mortgage was a very low risk, high reward proposition.

If you don't value these things, that's fine. But folks who pay off their mortgages generally do.

Actually I highly value those things (ability to pay regardless of future uncertainties, avoiding losing my home, etc.). And those are the exact reasons why it is needlessly risky to pay down the mortgage.

Let's do a hypothetical. Let's say you are dutifully paying down your mortgage for some number of years, and some unforeseen bad event happens. Illness and can't work, company goes out of business, whatever. Now you need money to live on or pay the doctor or whatever and you're sunk because your money is tied up in your house. You can't pay the mortgage, and the bank might still foreclose even if you are only one payment away.

Statistically, you're much more likely to have this occur if you stretch your mortgage exposure time to 30 years or even longer compared to if your repayment period is shorter (e.g., 15 years, 10 years, 5 years, etc). And if you're unemployed, there's unemployment insurance. If you can't work, there's disability insurance. If you have doctor bills, you can defer them and / or make minimum payments. But the odds of having to resort to *any* of these measures are greater if you keep an extant mortgage.

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If someone came to you and said they had an illiquid and slowly (or not at all) appreciating asset they wanted you to invest in for safety reasons, you'd say they are nuts. Yet that's what putting your money into the house is.

By this system of reasoning, you shouldn't have surge protectors, smoke alarms, circuit breakers, CO alarms, door locks, meat thermometers, freezers, fridges, sump pumps, or cars with airbags, seat belts, or crumple zones. None of those assets appreciate, although they're all strongly correlated with safety. There are a great many things more important in life than having appreciating assets.

HELOC. Refinance. Sell it and rent somewhere cheaper for a year or two until you get straightened out. Problem solved. I suppose you could say the value of your house tanked and you have no equity...but the last time that happened to a large extent the stock market crashed with it, so you would have ended up selling stock at a heavy loss and still been equally screwed.

In a prior post I mentioned that someone always brings up the HELOC at this point :) Borrowing money to pay back an existing loan is the path to madness. You are paying interest in order to pay interest. Terrible idea. And I really hope your plan isn't to rely on refinancing if lose your job. Banks like to see income before doing a refinance. At least mine do.

And what do you mean by "problem solved"? You are illustrating why I said this was risky. The goal was to not lose your house. If you are forced to sell, you just lost your house. Your "solution" is the very thing I want to avoid.

And don't forget the transactional costs associated with selling a house. They are substantial and they come straight out of your pocket. Markets may go up or down, but fees are lost forever.

it motivates me at work too to keep chunking down that mortgage, I do not get the same fuzzy feeling watching my brokerage account bounce around where the mortgage number only goes the direction I want at all times (down).

This. Especially as the FI fund goes up, 1k put in means so little. It varies multiples of that in a day. But with the mortgage, 1k took out 15+ days for sure.

I regret it a bit, but it was a much easier sell for my SO than additional investing would be (especially in 2008 when our rate was over 5%). We certainly would have ended up more to the positive if we had invested instead. But as a friend said when I showed her how close we are to being done on the mortgage, would I have stayed that dedicated if it was just savings? Impossible to know. And now we've built up those muscles, and we have our focus on a new goal - one that we can attack fully now that the cash flow is opened up.

We aren't taking the mathematically optimal path, or the fastest one, but we are going in the right direction, and we'll get there faster than most other people we know.

it motivates me at work too to keep chunking down that mortgage, I do not get the same fuzzy feeling watching my brokerage account bounce around where the mortgage number only goes the direction I want at all times (down).

This. Especially as the FI fund goes up, 1k put in means so little. It varies multiples of that in a day. But with the mortgage, 1k took out 15+ days for sure.

I regret it a bit, but it was a much easier sell for my SO than additional investing would be (especially in 2008 when our rate was over 5%). We certainly would have ended up more to the positive if we had invested instead. But as a friend said when I showed her how close we are to being done on the mortgage, would I have stayed that dedicated if it was just savings? Impossible to know. And now we've built up those muscles, and we have our focus on a new goal - one that we can attack fully now that the cash flow is opened up.

We aren't taking the mathematically optimal path, or the fastest one, but we are going in the right direction, and we'll get there faster than most other people we know.

On the flip side, with ~$50k in investment accounts and a $124k mortgage, I experience the opposite psychological effect. :P

We don't regret paying off our mortgage. We made the last payment 10 years after buying the house. It's only been 6 months since then, and we both breathe easier now. We've always kept investing, both taxable account and retirement accounts, and we've always had an emergency fund. We paid the last 30% of the mortgage off last year, during a down period of the market and an upswing in my income. So if we'd invested it in the market, we would have been flat in the short term at least. It just worked out that way; it wasn't an attempt to time the market. But that short term result did make it a little sweeter. Also, since DH and I each have our own businesses and can't count on a steady paycheck like employees do, we felt it was a better move for us, personally.